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By XE Market Analysis February 12, 2019 3:52 am
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    XE Market Analysis: Europe - Feb 12, 2019

    The main theme has been Yen underperformance, which has been concomitant with a cautious-but-distinct risk-on sentiment in global markets. USD-JPY rose to a near seven-week high of 110.65. EUR-JPY has also gained, while AUD-JPY has outperformed with a rise of 0.5% in making a six-day high at 78.35. The Dollar has entered a consolidation after a run of eight consecutive up days by the measure of the narrow trade-weighted USD index, which is the most sustained rally the index has seen in two years. EUR-USD has settled in the upper 1.1200s after yesterday printing a two-and-a-half month low at 1.1267. In stock markets, the Nikkei 225 closed 2.6% for the better amid a combo of catch-up gains, with Japanese markets reopening after yesterday's public holiday, and outperformance of exporter stocks as a consequence of the softer Yen. The MSCI Asia-Pacific (ex-Japan) index rose by 0.3%, while S&P 500 futures have gained 0.5% in overnight trading. News that U.S. lawmakers have reached an "agreement in principle" on border security that would avert another government shutdown at the end of the week, has been tonic, while on the U.S.-China trade talks front, officials from both sides have be setting market-soothing mood music with upbeat remarks. While few expect the issue of intellectual property is unlikely to be resolved to the full satisfaction of the Trump administration, there is a narrative in markets that we're at the point where there is scope for compromise.

    [EUR, USD]
    EUR-USD has settled in the upper 1.1200s after yesterday printing a two-and-a-half month low at 1.1267. The low reflected demand for Dollars, although it is also true to say that the evident slowing in the Eurozone economy has been a factor in making the U.S. currency a relatively attractive proposition. Some market narratives have also been highlighting that while the Fed made a hawkish-to-neutral shift in policy stance in January, the central bank has maintained gradual tightening by continuation of balance sheet shrinkage (which it's doing by refraining from reinvesting in replacement securities when bonds bought under the QE program mature). U.S. yields also remain significantly above those of German and Japanese yields, among others. We continue to take a bearish view of EUR-USD. Recent data out of the Europe have fed the Eurozone-slowing story. The European Commission last week slashed GDP growth projections for the Eurozone economy, to 1.3% for 2019, down from 1.9% previously projected. Brexit uncertainty is also in the mix, which January PMI reports evidenced as having a material impact on economic activity on the British side of the channel, which will have some drag on the continent's side. Juxtaposing this has been relatively upbeat incoming U.S. data, although there is a caveat as the data picture is incomplete and distorted as a consequence of the recent partial government shutdown. There are also expectations for some degree of compromise by the U.S. and China on the trade front. EUR-USD resistance comes in at 1.1300-10, and support at 1.1260-65.

    [USD, JPY]
    The Yen has remained under broad pressure, which has been concomitant with a cautious-but-distinct risk-on sentiment in global markets. USD-JPY rose to a near seven-week high of 110.65. EUR-JPY has also gained, while AUD-JPY has outperformed with a rise of 0.5% in making a six-day high at 78.35. In stock markets, the Nikkei 225 closed 2.6% for the better amid a combo of catch-up gains, with Japanese markets reopening after yesterday's public holiday, and outperformance of exporter stocks as a consequence of the softer Yen. The MSCI Asia-Pacific (ex-Japan) index rose by 0.3%, while S&P 500 futures have gained 0.5% in overnight trading. News that U.S. lawmakers have reached an "agreement in principle" on border security that would avert another government shutdown at the end of the week, has been tonic, while on the U.S.-China trade talks front, officials from both sides have be setting market-soothing mood music with upbeat remarks. While few expect the issue of intellectual property is unlikely to be resolved to the full satisfaction of the Trump administration, there is a narrative in markets that we're at the point, given abundant signs of slowing in global growth, and with President Trump already going into campaigning mode into the 2020 elections, where there is scope for compromise which would most likely see a further suspension of the tariff hike the U.S. has threatened to implement on March. This would maintain the exiting 10% duties but avoid the hike to a 25% tariff on $200 bln of Chinese goods the U.S. imports.

    [GBP, USD]
    Cable has settled to the upper 1.2800s after yesterday printing a three-week low at 1.2844. A slew of sub-forecast UK data yesterday, including Q4 and December releases for GDP, trade and production, added pressure on the Pound, with the evidence of Brexit-caused economic slowing gathering. General demand for Dollars was also in the mix. Regarding Brexit, like the BoE, we see a no-deal scenario as a low-risk probability, but there still remains a lack of clarity about how and when the process will be resolved. One way forward that looks likely would have sufficient parliamentary support is for the government and Labour opposition to reach accord comprise, which would entail remaining in the customs union, though Prime Minister May has so far been reluctant to go this route as it would severely split her party. The pound is continuing to trade at about a 13%-14% discount in trade-weighted terms relative to levels prevailing ahead of the vote to leave the EU in June 2016. Cable support at 1.2840, and resistance at 1.2900-05.

    [USD, CHF]
    EUR-CHF has settled to a consolidation in the lower-to-mid 1.1300s after printing a two-week low at 1.1310. Broad declines in the Euro have been weighing with incoming data continue to painting a picture of a stagnating Eurozone economy. The cross had in the early part of last week spiked to a three-month high at 1.1443. The price action continues a phase of relatively high volatility EUR-CHF has been experiencing. Since early January there have been several bouts of pronounced underperformance in the Swiss franc, often accompanied by talk/suspicions of SNB intervention. SNB vice president, Zurbruegg, also said last month that the franc "remains highly valued" and the situation on foreign currency markets is "still fragile" and that the SNB's two pillar strategy of negative interest rates and ad-hoc currency interventions, or threat thereof, "remains appropriate." SNB Chairman Jordan said that for 2019 the biggest concerns are "political mistakes," pointing to the U.S.-China trade war and "Brexit and the European situation." Jordan also expressed concern about further safe-haven driven franc appreciation, "especially" in a no-deal Brexit scenario.

    [USD, CAD]
    USD-CAD has continued to ply a relatively narrow, consolidative range in the upper 1.3200s after recovering out o the 1.3232 low that was seen in the wake of Canada's January employment report on Friday. That interrupted a run of five consecutive higher highs in USD-CAD, which was seen as oil prices tumbled by over 5%. The Canadian Dollar still remains up by over 2.5% against the U.S. buck on the year-to-date. This has been concomitant with the 15%-plus gain seen in oil prices over the same period. Sustained gains in crude prices are a boon to Canada's terms of trade, and vice versa. USD-CAD has support at 1.3230, and resistance at 1.3319-20.

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